What Would Hedge Fund Do With BMC Software, Compuware?

Seven months after Elliott Management, likely the oldest hedge fund, made an offer for BMC Software (NASDAQ:BMC), it made another bid for Compuware Corp. (NASDAQ:CPWR).

The New York-based hedge fund run by Paul Singer, 68, a major contributor to the Republican Party as well as to candidates who support gay marriage and civil rights because he has a gay son, reportedly has $20 billion in assets.

Compuware, based in Detroit, has a market capitalization of $2.3 billion, which is what Elliott is willing to pay for the 92 percent of the company it doesn't own yet. BMC Software, of Houston, is valued at $6.4 billion, about $900 million below the level at which Elliott acquired its 5 percent stake in the company.

While both are well-regarded network management developers that may have lost some of the shine they had in another era, the question is whether a hedge fund like Elliott really wants either company.

Usually, activist investors like Carl Icahn or Elliott acquire stakes in a technology company in order to put it in “play,” with either a competitor or a private equity company such as KKR (NYSE:KKR), Bain Capital or a technology specialist like Thoma Bravo coming to the rescue.

Last year, Third Point Capital, the New York hedge fund of Daniel Loeb, acquired a 5.8 percent stake in Yahoo (NASDAQ:YHOO), the No. 3 search engine, after CEO Carol Bartz was fired; it then agitated for a shake-up of the board, new management and ways to unlock the value of overseas assets, notably in China's Alibaba Group and Yahoo Japan (TYO:4689).

In May, after forcing out interim CEO Scott Thompson, Third Point agreed to a “standstill agreement” that gave it four directors, increased to five last week, and a role in selecting Marissa Mayer, a VP at Google (NASDAQ:GOOG), as the latest CEO.

Shares of Yahoo, in Sunnyvale, Calif., have gained more than 30 percent over the past year, which ought to please Loeb. But he still has more work to do to make even better money for himself.

What about Elliott? The hedge fund went after the government of Argentina over bad debts and had one of its yachts seized when it docked in Ghana. Last week, a court in Germany ordered the yacht freed.

But why would Elliott want to be manager of two huge software companies, dealing with new products, updates and customers?

“We believe in the quality of Compuware's assets,” a note to the Compuware board from the hedge fund said. “Execution, profitability and growth have significantly underperformed.”

Aaron Schwartz, an analyst with Jefferies, recalled that prior to Elliott's involvement with technology companies, Packeteer, Novell and Epicor Software triggered takeovers by a third party. The first two were acquired by companies and the third by a private equity firm.

So the likely outcome, Schwartz said, is for a similar takeover, leaving Elliott richer but without management responsibility. First, Compuware will have to offer a formal response, likely declaring the bid too low, which would then lead to counterbids or other companies stepping up.

Given that 80 percent of Fortune 500 companies use Compuware products, a portfolio not that different from BMC's, it's likely that another company flush with cash might step up.

From International Business Machines Corp. (NYSE:IBM) to Oracle (NASDAQ:ORCL) to CA Inc. (NASDAQ:CA), there are technology bidders with a lot of practice. If not, Elliott's Singer may have to start learning a lot more about software codes and network management in 2013.